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What is Bitcoin?



Bitcoin is the world's best-known cryptocurrency. It was introduced in 2008 in a white paper by an unknown author with the pseudonym Satoshi Nakamoto.


The special thing about Bitcoin is that this currency is controlled and managed decentrally. This is in contrast to classic fiat currencies such as the euro or the US dollar, whose monetary policy is controlled by a central bank.


In this article, we explain exactly what Bitcoin is, how the cryptocurrency works and what the price development has been so far.



HOW DOES BITCOIN WORK?


Bitcoin's success also lies in its clear aversion to central banks, which had come under heavy criticism due to the financial crisis of 2007-2008. Bitcoin has a maximum spending amount of 21 million BTC, which is intended to avoid monetary depreciation (inflation). With Bitcoin, this is decided decentrally via many thousands of nodes in the Bitcoin network.


With Bitcoin, it is possible to send money within seconds to recipients all over the world without revealing one's own name. In addition, Bitcoin is accepted as a means of payment at some shops and merchants. However, most users use it for investment.


Basics & Security

Of course, you can buy and send Bitcoin without knowing all the details of the Bitcoin blockchain. It is important to know the concept of a bitcoin wallet. Bitcoins are stored in a wallet and can be sent to the wallet addresses of strangers, acquaintances or even strangers. If you install a wallet as an app on your smartphone, you generate a wallet address.


This is similar to an account number; anyone who wants to send money must know the wallet address of the recipient. Each wallet also includes a private key that must be kept secret. Many wallet providers manage this key for a user, so you don't have to worry about it.


Transactions


The Bitcoin blockchain is actually a digital and distributed account book in which all transactions are noted with sender and recipient. However, the sender and recipient are not known by name, but by their wallet address. The current account balance of each wallet is noted in the account book. Then a user can only transfer or send those BTC that really belong to him.


All miners active in the network have the same current version of the account book stored on their computer; there is agreement on the current state of the account book. Through the process of mining, all processed transactions are ranked and stored in the blockchain in encrypted blocks using cryptography.


Transactions via wallets


Bitcoins are stored in digital wallets; transactions take place between two wallets. A wallet always consists of a matching key pair, which includes a public and a private key. The public key is also the address of the Bitcoin wallet; it is needed so that friends and acquaintances can send you Bitcoin. The private key is used to sign a transaction, but is never revealed to other parties in the process.


Signing proves that you are the owner of the wallet from which bitcoin are sent. A signed transaction is confirmed and validated during the mining process within just under 10 minutes. As the owner of a wallet, you must always keep your private key secret. If a hacker knows both keys, he could loot a Bitcoin wallet. It is important that a public key cannot be used to infer the corresponding private key.


Processing (Bitcoin Mining)


In the decentralised Bitcoin network, participants known as nodes must decide in a collective vote whether a transaction is valid or not. The rules by which this is determined are called the consensus mechanism. This distributed process is called mining, in reference to gold mining. In this process, transactions are ordered in a chronological sequence and finally stored together in a block. This block complies with cryptographic rules; the block is encrypted using a mathematical hash function.


Each block contains a reference to all preceding blocks. This creates a chain of blocks (= blockchain), previous blocks cannot be processed. In mining, each active miner proposes a solution for the mathematical process of encryption, a miner is chosen at random. This process, known as proof-of-work, is energy-intensive, but stands for independence and freedom from censorship or manipulation. Selected users are compensated for their computing power with BTC as a mining reward.



WHAT DOES A BITCOIN COST?


Since the first Bitcoins were issued in 2009, the Bitcoin price has experienced enormous price increases, but also periods of strong price fluctuations. At the end of 2009, one Bitcoin was worth about 0,08 euros.

Year

Year-end price

2010

0,25 €

2011

22,59 €

2012

13,05 €

2013

544,73 €

2014

260,50 €

2015

393,46 €

2016

912,26 €

2017

11630,78 €

2018

3252,63 €

2019

6411,12 €

2020

9157,68 €


ADVANTAGES AND DISADVANTAGES OF BITCOIN


Advantages
  • Less risk for businesses: Bitcoin transactions are not reversible, as is the case with PayPal or credit cards, for example. In addition, no personal data is required for Bitcoin transactions, which is advantageous for the customer.

  • Independence: With Bitcoin, you are your own bank and have complete control over your own money. You don't have to rely on entities that could freeze your money. No limits, no holidays, no time or location restrictions.

  • (Relatively) Low fees and fast transactions: A bitcoin transaction basically takes only 10 minutes and with low fees. Provided the Bitcoin network is not busy.

Disadvantages
  • Volatility: Anyone who follows the price of Bitcoin and other digital currencies knows that cryptocurrencies are extremely volatile. Certain events and activities can greatly affect the price.

  • Novelty: Bitcoin and the technology is still novel and complex. Bugs can creep in with new systems, there is always that risk.

  • Trust and acceptance: People need to trust Bitcoin for the digital currency to establish itself as a means of payment.


FREQUENTLY ASKED QUESTIONS ABOUT BITCOIN


What is Bitcoin explained simply?

Bitcoin explanation: Bitcoin (short: BTC) is a digital and decentralised currency based on blockchain technology. It is the pioneer among cryptocurrencies. Bitcoin can also be considered the best-known and most successful digital currency worldwide.


What are the advantages of Bitcoin?

Bitcoin is an interesting alternative when classic markets weaken. A particular advantage is also the flexible applicability of the currency as a global means of payment, as transactions can be carried out quickly and cheaply. The deflation of real currencies strengthens the demand for Bitcoin in particular.


Where can you buy Bitcoins seriously?

There are many reputable platforms where you can buy Bitcoins, such as eToro. Another option is to buy via a Bitcoin exchange. Here, in contrast to the marketplaces, trading takes place automatically.


Where should I store my Bitcoins?

Bitcoins should be transferred to a private wallet. This is a kind of digital wallet. There are, for example, online wallets or hardware wallets.

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